Appeal
from the United States District Court for the Northern
District of Georgia D.C. Docket No. 1:13-cv-00086-TCB

Before
MARCUS and NEWSOM, Circuit Judges, and MOORE, [*] District Judge.

MARCUS, CIRCUIT JUDGE

In this
battle between primary and excess liability insurance
companies, American Guarantee & Liability Insurance Co.
(AGLIC) appeals the district court's grant of summary
judgment to American International Group, Inc. subsidiaries
National Union Fire Insurance Co., American Home Assurance
Co., and New Hampshire Insurance Co. (collectively,
"AIG"). AGLIC claims that AIG, acting as a primary
insurer, improperly allocated settlement payments between two
insurance policies on behalf of their mutual insured,
Imperial Sugar Co. As a consequence, AGLIC contends that AIG
breached its duty to Imperial by prematurely subjecting it to
excess liability. As Imperial's excess insurer, AGLIC
seeks to pursue Imperial's breach-of-duty claim against
AIG utilizing the doctrine of equitable subrogation.

When
the case reached this Court, we asked the parties for
supplemental briefing on subject matter jurisdiction. In
examining diversity jurisdiction, the district court is not
bound by the formal alignment of the parties provided in the
pleadings. Rather, the court must align the parties according
to their true interests in the litigation. City of
Indianapolis v. Chase Nat'l Bank, 314 U.S. 63, 69
(1941); City of Dawson v. Columbia Ave. Sav. Fund Safe
Deposit, Title & Tr. Co., 197 U.S. 178, 180 (1905).
In this case, because the interests of St. Paul and AGLIC
were coextensive, there was an absence of complete diversity
of citizenship, and the district court lacked the power to
entertain the matter in the first place. Accordingly, we
vacate the court's judgment and remand with instructions
to dismiss.

I.

This
dispute arose out of several catastrophic explosions at an
Imperial Sugar Co. refinery in Port Wentworth, Georgia, which
killed 14 and wounded 36 workers. The workers and their
families responded by filing tort and workers'
compensation claims against Imperial. The claims were handled
by AIG, which provided Imperial with a $26 million general
liability insurance policy ("AIG GL") and an
unlimited workers' compensation insurance policy
("AIG WC"). As its defense strategy, AIG sought to
arrange global settlements of the tort and workers'
compensation claims. Ultimately, AIG settled 41 of the 67
claims against Imperial for roughly $28.5 million -- far less
than Imperial's expected liability. However, AIG GL paid
90 percent of the global settlements (approximately $25.5
million), while AIG WC paid only 10 percent (approximately $3
million).

According
to Imperial's excess insurers, St. Paul Fire & Marine
Insurance Co. and AGLIC, because AIG GL was capped while AIG
WC was unlimited, AIG WC should have enlarged its
contributions to the settlements in order to maximize the
protections afforded by AIG GL. St. Paul and AGLIC contended
that AIG prematurely exhausted AIG's general liability
insurance policy through its lopsided settlement allocations,
thereby breaching its duty to Imperial by exposing it to
undue excess liability. As Imperial's excess insurers,
St. Paul and AGLIC bore the burden of AIG's alleged
breach, and sought to assert Imperial's cause of action
through equitable subrogation.

Thus,
in January 2013, St. Paul sued AGLIC and AIG subsidiaries
National Union Fire Insurance Co., American Home Assurance
Co., and New Hampshire Insurance Co. in the United States
District Court for the Northern District of Georgia. St. Paul
sought a declaration that AIG improperly exhausted its
general liability policy, entitling St. Paul to recoupment of
settlement and defense expenditures incurred under its excess
policy. In its complaint, St. Paul arranged the parties'
citizenships this way:

Plaintiff

Defendant

St. Paul (MN, CT)

National Union (PA, NY)

American Home (NY)

New Hampshire (PA, NY)

AGLIC (NY, IL)

In
February 2013, AGLIC filed an answer admitting essentially
all of the allegations in St. Paul's complaint.
AGLIC's answer included a cross-claim against AIG
leveling the same allegations and requesting the same relief
that St. Paul had sought. AGLIC claimed the district court
had supplemental jurisdiction over its cross-claim under 28
U.S.C. § 1367(a), since St. Paul's complaint
established diversity jurisdiction, and AGLIC's
cross-claim arose out of a common nucleus of law and fact.

After
more than two years of discovery, AIG moved for summary
judgment, alleging an absence of evidence to support St. Paul
and AGLIC's claims. The district court entered summary
judgment for AIG, and St. Paul and AGLIC appealed. In June
2016, St. Paul moved to voluntarily dismiss its appeal with
prejudice. The Court granted the motion, leaving AGLIC as the
sole appellant against AIG. Order of Dismissal, July 16, 2016
(ECF No. 34).

In
October 2017, we directed the parties to file supplemental
briefs addressing this Court's power to entertain the
appeal. According to the parties, we retained supplemental
jurisdiction over the appeal pursuant to 28 U.S.C. §
1367(a), which reads this way: "[I]n any civil action of
which the district courts have original jurisdiction, the
district courts shall have supplemental jurisdiction over all
other claims that are so related to claims in the action
within such original jurisdiction that they form part of the
same case or controversy under Article III of the United
States Constitution." Although the exercise of
supplemental power is discretionary, the district courts may
exercise supplemental jurisdiction to consolidate closely
related claims into a single proceeding in order to preserve
judicial resources and avoid inconsistent judgments.
Rosado v. Wyman, 397 U.S. 397, 405 (1970)
(describing the "commonsense policy" of
supplemental jurisdiction as being grounded on "the
conservation of judicial energy and the avoidance of
multiplicity of litigation"). It is also true that if
there is supplemental jurisdiction at the time the suit was
commenced, the court may continue to exercise that power even
if the original basis for jurisdiction is later eliminated.
Id. ("We are not willing to defeat the
commonsense policy of pendent jurisdiction . . . by a
conceptual approach that would require jurisdiction over the
primary claim at all stages as a prerequisite to resolution
of the pendent claim.").

The
parties claim that, since their citizenships were completely
diverse and the amount in controversy exceeded $75, 000 at
the time of filing, St. Paul's original complaint
conferred diversity jurisdiction on the district court
pursuant to 28 U.S.C. § 1332(a). They also say that the
district court properly exercised supplemental jurisdiction
over AGLIC's cross-claim because it was so interwoven
with the complaint as to form "part of the same case or
controversy." They add that St. Paul's voluntary
dismissal did not divest this Court of jurisdiction, and that
the exercise of supplemental jurisdiction continues to serve
the interests of judicial economy and fairness. Thus, the
...

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